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FILED

MAR 17 2014

SUSAN M. SPRAUL, CLERK

U.S. BKCY. APP. PANEL

OF THE NINTH CIRCUIT

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUIT

In re: ) BAP No. CC-13-1368-TaKuPa

)

MATTHEW F. GALLAGHER and ) Bk. No. 12-10213-NB

MELISSA A. GALLAGHER, )

)

Debtors. )

______________________________)

MATTHEW F. GALLAGHER; )

MELISSA A. GALLAGHER, )

)

Appellants, )

)

v. ) MEMORANDUM*

)

KATHY A. DOCKERY, Chapter 13 )

Trustee; BOROWITZ & CLARK LLP,)

)

Appellees. )

______________________________)

Argued and Submitted on February 20, 2014

at Pasadena, California

Filed - March 17, 2014

Appeal from the United States Bankruptcy Court

for the Central District of California

Honorable Neil W. Bason, Bankruptcy Judge, Presiding ________________________________

Appearances: Appellant Melissa A. Gallagher argued pro se;

Akihito Koyama on brief for Appellee, Kathy A.

Dockery, Chapter 13 Trustee; Michael Erik Clark,

Nancy Bonaccorso Clark and Shannon A. Doyle of

Borowitz & Clark, LLP, on brief for Appellee,

Borowitz & Clark, LLP.

________________________________

Before: TAYLOR, PAPPAS, and KURTZ, Bankruptcy Judges.

* This disposition is not appropriate for publication. 

Although it may be cited for whatever persuasive value it may

have (see Fed. R. App. P. 32.1), it has no precedential value. 

See 9th Cir. BAP Rule 8013-1.
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INTRODUCTION

Debtors Matthew and Melissa Gallagher retained appellee

Borowitz & Clark, LLP (the "Firm") as bankruptcy counsel in a

chapter 131

 case. The Firm represented Debtors until the

bankruptcy court sustained objections to Debtors’ amended

chapter 13 plan and then substituted out of the case. It

obtained a fee award, but only after the bankruptcy court

converted the case to a chapter 7 proceeding. The bankruptcy

court later reconverted the case to chapter 13. This appeal

stems from a post-reconversion order2 (the “Turnover Order”)

requiring that Debtors return to Chapter 13 Trustee Kathy Dockery

the plan payments that she refunded to them after the initial

conversion. The Chapter 13 Trustee sought return pursuant to

§ 105(a) and for the specific and sole purpose of paying the

Firm's fees. The bankruptcy court granted the Chapter 13

Trustee’s request – not under § 105(a) but under § 542 – and, in

addition to ordering turnover, provided the Firm with immediate

collection rights.

We determine that the bankruptcy court erred, as a matter of

law, and, therefore, we REVERSE.

FACTS

The relevant facts are not in dispute. Debtors filed their

1 Unless specified otherwise, all chapter and section

references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and

all “Rule” references are to the Federal Rules of Bankruptcy

Procedure, Rules 1001-9037.

2

 Debtors’ notice of appeal states that they appeal from

the Memorandum Decision Holding Debtors Jointly and Severally

Liable Under 11 U.S.C. [§] 542, which the bankruptcy court

entered on July 22, 2012, the same day that it issued the

Turnover Order.

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petition pro se, but subsequently retained the Firm which filed

an amended chapter 13 plan and responded extensively to plan

objections filed by Debtors’ mortgage lender, U.S. Bank. The

Debtors challenged the mortgage debt on their residence on

multiple grounds.3

 The bankruptcy court ultimately sustained

U.S. Bank's objections in a memorandum decision entered on

July 12, 2012. It then held two hearings on July 17, 2012. 

Debtors did not appear at either hearing, but the Firm appeared

at both. 

At the first hearing, the Firm advised the bankruptcy court

that the Firm no longer represented the Debtors. It then

disclosed that the Debtors did not make their July plan payment. 

In response, the bankruptcy court converted the case to a

chapter 7 case. 

At the second hearing, held in connection with U.S. Bank’s

relief from stay motion, the Firm appeared on behalf of Debtors. 

U.S. Bank advised the bankruptcy court that it would accept its

tentative ruling, which provided for a four-week continuance to

allow U.S. Bank to supplement the record, but asked that Debtors

resume regular payments in the interim. The Firm then disclosed

that the Debtors could not do so. In response, the bankruptcy

court granted stay relief. 

The following day, the Firm filed an application for

approval of supplemental attorney’s fees. No one objected to

3

 We take judicial notice of the documents on the

bankruptcy court’s electronic docket in the bankruptcy case. See

O’Rourke v. Seaboard Sur. Co. (In re E.R. Fegert, Inc.), 887 F.2d

955, 957-58 (9th Cir. 1989) (reviewing court may take judicial

notice of underlying bankruptcy documents).

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this request, and the bankruptcy court later entered an order

(the “Fee Order”) awarding fees in the amount of $17,415.21. Two

weeks before entry of the Fee Order, however, the bankruptcy

court entered the order converting the case (the “Conversion

Order”). The bankruptcy court, therefore, modified the Fee Order

by striking “13" and inserting “7," to provide that the

“Chapter 7 Trustee is directed to pay” the allowed fees from the

estate, funds permitting and subject to § 726(b).4

 Fee Order

(dkt. #67).

Shortly thereafter, the Chapter 13 Trustee filed and served

her Notice of Intent to File Trustee’s Final Report and Account

(“Notice of Intent”). The Notice of Intent provided an objection

period of thirty days after the service date of August 23, 2012. 

The first page of the attachment to the Notice of Intent

disclosed that the Firm did not hold an allowed claim. The

second page identified $8,297.00 as “Debtor Refunds.” The

Chapter 13 Trustee also mailed a check for $8,297.00 (the

"Refund") to the Debtors on August 23, 2012; the Debtors promptly

cashed it.

Seven days later, and before termination of the 30-day

notice period, the Chapter 13 Trustee filed a declaration

(purportedly executed the next day, August 31, 2012) and stated

under penalty of perjury that she had received no objection to

the Notice of Intent within the period permitted by Rule 5009. 

She filed her Final Report and Account on August 31, 2012; an

4 Section 726(b) provides that allowed § 503(b)

administrative claims incurred postconversion take priority over

allowed § 503(b) administrative claims incurred preconversion.

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order entered September 12, 2012 that discharged her as Trustee

in the chapter 13 case and exonerated her bond.

The Chapter 13 Trustee eventually realized that the Firm

obtained a Supplemental Fee Award postconversion, but did not get

paid. She sent a written demand to the Debtors requesting prompt

return of the Refund; the Debtors did not respond. She then

entered into a stipulation with the chapter 7 trustee5

(“Stipulation”) agreeing to reconvert the chapter 7 case to

chapter 13 for the purpose of filing a motion seeking to require

turnover of the Refund and payment of the Firm. The bankruptcy

court6 entered an order approving the Stipulation and

reconverting the case to chapter 13 (“Reconversion Order”), and

thereafter the Chapter 13 Trustee filed her motion to compel

turnover (“Turnover Motion”). 

The Chapter 13 Trustee based the Turnover Motion on the

bankruptcy court’s broad discretion under § 105(a). She argued

that fairness and equity demanded that the Debtors return the

Refund because they received it “purely due to an administrative

error” and as a result of “excusable neglect or mistake." 

Turnover Motion at 6 (dkt. #89).

The Debtors opposed the Motion to Compel Turnover on

multiple grounds. Of most relevance here, they argued that use

of § 105 to require return of the Refund and to require payment

5 The Chapter 13 Trustee’s counsel executed the Stipulation

on behalf of the Chapter 13 Trustee on September 11, 2012, and

filed it on September 12, 2012, the day the Chapter 13 Trustee

was discharged.

6

 Judge Barry Russell, the judge assigned the chapter 7

case, signed the Reconversion Order.

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of the Firm from the Refund created a conflict with other

provisions of the Bankruptcy Code.7

 They pointed out that,

pursuant to § 1326(a)(2), the Chapter 13 Trustee lacked authority

following conversion to pay creditors any undistributed funds and

that payment to the Debtors of the Refund did not create a

windfall to the Debtors because § 541(a)(6) excluded the Debtors’

postpetition earnings from inclusion in the chapter 7 estate. 

The Debtors also cited Warfield v. Salazar (In re Salazar),

465 B.R. 875 (9th Cir. BAP 2012), for its discussion and

application of the plain language of § 348(f)(1)(A) to exclude

from property of a converted chapter 7 estate, tax refunds that

the debtors spent during their chapter 13 case for normal living

expenses. 

Over the Debtors’ opposition, and after hearing,8 the

bankruptcy court granted the Chapter 13 Trustee’s request. It

entered a memorandum decision and the Turnover Order on July 22,

2013. The bankruptcy court, however, did not grant the Turnover

Motion pursuant to § 105(a). Rather, it based the Turnover Order

on § 542.9 The Turnover Order also recites that it is

enforceable by any appropriate representative of the bankruptcy

7 Debtors direct this argument, in part, to the

reconversion of the case to chapter 13, which they argue violates

their rights under the 13th Amendment of the Constitution. As

discussed below, we lack jurisdiction to review the Reconversion

Order, and we therefore do not consider this argument.

8 At the hearing, the Debtors advised the bankruptcy court

that they had not been unwilling to return the Refund to the

Chapter 13 Trustee, they just did not have it anymore.

9

 The bankruptcy court, however, misstated in the

Memorandum Decision that the Chapter 13 Trustee brought the

Turnover Motion pursuant to § 542.

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estate; if not paid in full within 60 days, allowed entry of a

payroll deduction order; and, was explicitly without prejudice to

the rights of the Firm, subject to the automatic stay, to collect

their allowed fees from Debtors, "together with any appropriate

interest, costs of collection, and other charges." Turnover

Order at 2 (dkt. #106).

The Debtors timely filed a notice of appeal from the

Turnover Order. 

JURISDICTION

The bankruptcy court had jurisdiction under 28 U.S.C.

§§ 1334 and 157(b)(2)(A) and (E). 

We have jurisdiction under 28 U.S.C. § 158(a) and (b) to

hear appeals from final judgments, orders, and decrees; and with

leave of the Panel, from interlocutory orders and decrees of

bankruptcy judges. Rule 8002 provides that a notice of appeal

must be filed with the clerk within 14 days of entry of the

judgment, order, or decree. 

Debtors include in their statement of issues on appeal

several issues relating to the Conversion Order, the Fee Order,

and the Reconversion Order. The bankruptcy court entered the

Conversion Order on July 26, 2012, the Fee Order on August 9,

2012, and the Reconversion Order on September 20, 2012. Debtors

filed their notice of appeal from the Turnover Order on July 31,

2013, long after the 14-day filing period provided under

Rule 8002 expired as to all but the Turnover Order. 

The burden of demonstrating jurisdiction lies with the party

asserting it. Kokkonen v. Guardian Life Ins. Co. of Am.,

511 U.S. 375, 379-80 (1994). Here, Appellants merely state that

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we have appellate jurisdiction pursuant to 28 U.S.C. § 158. They

offer no authority to establish our jurisdiction to hear

challenges to the final and non-appealable Conversion Order, Fee

Order, or Reconversion Order. We, therefore, conclude that we

have jurisdiction under 28 U.S.C. § 158 solely with respect to

the Turnover Order.

ISSUE

Whether the bankruptcy court erred in entering the Turnover

Order.

STANDARD OF REVIEW

We review the bankruptcy court’s interpretation of the

Bankruptcy Code de novo. Shapiro v. Henson, 739 F.3d 1198, 2014

U.S. App. LEXIS 440, *4 (9th Cir. 2014). De novo review means

that our review is independent; we give no deference to the

bankruptcy court's conclusion. See First Ave. W. Bldg., LLC v.

James (In re Onecast Media, Inc.), 439 F.3d 558, 561 (9th Cir.

2006).

DISCUSSION

A. Section 542 does not support the Turnover Order.

The bankruptcy court’s analysis under § 542 was relatively

brief. The bankruptcy court recited that § 542 requires that: 

“Persons who receive ‘possession, custody, or control’ of

property of the bankruptcy estate must deliver such property to

the trustee and account for such property ‘or the value of such

property.’” Memorandum Decision at 3 (dkt. #105)(emphasis in

original). From there, the bankruptcy court quoted Ninth Circuit

authority:

“If a debtor demonstrates that she is not in possession

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of the property of the estate or its value at the time

of the turnover action, the trustee is entitled to

recovery of a money judgment for the value of the

property of the estate.” In re Rynda, 2012 WL 603657

at *2 (9th Cir. BAP) (sic) (unpublished); and In re

Newman, 487 B.R. 193, 198-202 (9th Cir. BAP 2013)

(following Rynda).

Id. The bankruptcy court then concluded that “Debtors are liable

for the dollar amount of the [Refund].”10 Id. The bankruptcy

court found the Debtors’ Salazar argument inapplicable.11

Instead, the bankruptcy court reasoned that the Debtors

accidentally received property of the estate12 that should have

been paid to the Firm and that, despite having spent the Refund,

they remained contractually and legally obligated to return the

Refund or its value. We determine that the bankruptcy court

erred, as a matter of law, in its application of § 542. 

As the Debtors correctly argue on appeal, their chapter 13

plan payments were not property of the chapter 7 estate, and the

Chapter 13 Trustee properly paid the Refund to the Debtors as

required by §§ 348(f)(1)(A) and 1326(a)(2). And because the

10 The bankruptcy court’s memorandum decision specifically

states that it “memorializes and elaborates on the Court’s ruling

at the hearing.” Memorandum Decision at 3. The bankruptcy

court’s oral ruling, however, did not further expand its

reasoning, and the tentative ruling issued in advance of the

hearing likewise contained very limited analysis.

11 We agree that Salazar is distinguishable on its facts;

it involved (a) a § 542 motion filed by the chapter 7 trustee in

the debtors’ converted case, not a motion by a chapter 13

trustee; and (b) tax refunds received by the debtors prior to

conversion that they conceded to be property of their estate

pursuant to § 541(a). Salazar, 465 B.R. at 877-78. Nonetheless,

Salazar does support a conclusion that the Debtors were permitted

to spend the refunded amounts for living expenses during the

converted chapter 7 case.

12 The bankruptcy court did not discuss or present analysis

as to whether the funds continued to be property of the estate

after conversion, during the chapter 7 case, or on reconversion.

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Debtors were no longer in possession or control of the Refund at

the time of reconversion, the Refund did not become property of

the chapter 13 estate on reconversion. 

We further determine that even if the Refund became property

of the chapter 13 estate on reconversion, the Chapter 13 Trustee

lacked standing to bring a motion under § 542. Thus, the

bankruptcy court erred by granting relief under § 542.

1. Property of the estate on reconversion.

When the Debtors’ case converted to chapter 7,

§ 348(f)(1)(A) defined the property of the chapter 7 estate as

“property of the estate, as of the date of filing of the

petition, that remains in the possession of or is under the

control of the debtor on the date of conversion.” It is

undisputed that the Refund consisted of postpetition plan

payments made from the Debtors’ postpetition earnings. And it is

undisputed that the Chapter 13 Trustee remained in custody and

control of the Refund on the conversion date. Thus, on the

conversion date, the Refund was not a prepetition asset, was not

in the “possession of” the Debtors, and was not under the

Debtors’ “control.” As such, the Refund did not become property

of the Debtors' chapter 7 estate. See In re Michael, 699 F.3d

305, 313 (3d Cir. 2012) (“property acquired post-petition that is

in the Chapter 13 estate at the time of conversion is not

property of the new Chapter 7 estate.”).

It is not disputed that the Debtors received the Refund

postconversion and in accordance with the Notice of Intent. The

Debtors advised the bankruptcy court that they spent the Refund

on living expenses during their chapter 7 case. At the time they

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spent the Refund, it was not property of their chapter 7 estate,

and no Bankruptcy Code provision prohibited their use of the

Refund. The bankruptcy court’s conclusion that Debtors had no

right to spend the Refund, thus, was in error.

Upon reconversion to chapter 13, § 1306 defined property of

this second chapter 13 estate. In relevant part, § 1306 provides

that property of a chapter 13 estate includes, in addition to the

property specified in § 541, “earnings from services performed by

the debtor after commencement of the case but before the case is

closed, dismissed, or converted to a case under chapter 7, 11, or

12 of this title, whichever occurs first.”13 Thus, property of

the second chapter 13 estate could include the Debtors’

postpetition earnings and, thus, the Refund. Debtors, however,

must have retained some interest in the Refund at the time of

reconversion for it to constitute property of the second

chapter 13 estate. To the extent Debtors spent the Refund, they

no longer held any interest therein. See § 541(a) (property

includes all “interests” of the debtor). Put another way,

reconstituting the estate on reconversion does not change the

nature of the asset when spent. The Refund, which was the

Debtors’ property during the chapter 7 case and spent by Debtors

during the chapter 7 case, did not become property of the

reconverted chapter 13 estate because it no longer existed. 

Therefore, the Refund is not appropriately subject to a § 542

order in the second chapter 13 case.

13 Neither conversion, nor reconversion, effects a change

in the date of “commencement of the case.” See § 348(a).

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2. The Chapter 13 Trustee lacks § 542 standing.

In a § 542 turnover action, the “property being sought is

‘property that the trustee may use, sell, or lease under section

363 of this title.” Shields v. Adams (In re Adams), 453 B.R.

774, 777 (Bankr. N.D. Ala. 2011). This necessary element of

§ 542 presents an insurmountable problem for the Chapter 13

Trustee. Under § 1303, a chapter 13 trustee is prohibited from

using, selling, or leasing property of the estate. Rather,

§ 1303 provides that the debtor, “exclusive of the trustee,” has

the rights and powers of a trustee under § 363(b). 

On reconversion, the Debtors became entitled under § 1306 to

sole possession of property of the second chapter 13 estate, and

under § 1303 they had the sole authority to exercise rights under

§ 363(b). If the Refund became an asset of the second chapter 13

estate upon reconversion, only the Debtors could use and control

the Refund; the Chapter 13 Trustee could not compel turnover. 

She could object to their plan (they didn't intend to file one). 

She could request dismissal of their case (they wanted that to

happen). What she could not do as a chapter 13 trustee was

require them to turnover the Refund or any other asset under

§ 542 or to use any particular asset for a particular purpose

under § 542. Therefore, the bankruptcy court erred as a matter

of law when it granted the Chapter 13 Trustee turnover rights

under § 542.

B. Section 105(a) does not support turnover.

We may affirm on any basis in the record. See Caviata

Attached Homes, LLC v. U.S. Bank, N.A. (In re Caviata Attached

Homes, LLC), 481 B.R. 34, 44 (9th Cir. BAP 2012). Because the

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chapter 13 Trustee initially brought this motion under § 105(a),

we also consider whether it supports affirmance here. We

determine that it does not.

Section 105(a) provides, in relevant part, that the “court

may issue any order, process, or judgment that is necessary or

appropriate to carry out the provisions of this title.” Despite

this broad statement, “it is generally agreed that § 105 is not a

roving commission to do equity or to do anything inconsistent

with the Bankruptcy Code.” Yadidi v. Herzlich (In re Yadidi),

274 B.R. 843, 848 (9th Cir. BAP 2002). As the Supreme Court

recently observed, it is impossible to "carry out" the provisions

of the Bankruptcy Code through actions that the Bankruptcy Code

does not allow. Law v. Siegel, 571 U.S. ____, 2014 U.S. LEXIS

1784, *11 (2014). Here, the Chapter 13 Trustee attempts to use

§ 105(a) to achieve results that are directly contrary to the

result required by other Bankruptcy Code provisions.

The Chapter 13 Trustee seeks control over the Refund, an

asset that was properly turned over to the Debtors and properly

spent by the Debtors. As discussed above, it is an asset that

did not survive to become part of the second chapter 13 estate. 

But if it did, § 1306(b) mandates that: “[e]xcept as provided in

a confirmed plan or order confirming a plan, the [chapter 13]

debtor shall remain in possession of all property of the estate.” 

Here, if the Refund became part of the second chapter 13 estate,

there is no confirmed plan, and no plan is even contemplated. 

Thus, the Bankruptcy Code leaves control over the Refund - if it

is an estate asset at reconversion - solely in the Debtors'

hands. Requiring Debtors under § 105 to disgorge funds for any

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reason (equitable or otherwise) is inconsistent with the

provisions of § 1306. 

Nor do we agree that the Chapter 13 Trustee mistakenly

disbursed the Refund to the Debtors. The interplay between

§§ 348 (governing conversion) and 1326 (governing a chapter 13

trustee’s retention or disbursement of plan payments) mandates

this result. See Viegelahn v. Harris (In re Harris), 491 B.R.

866 (W.D. Tex. 2013) (interpreting § 348(f)(1)(A), chapter 13

trustee was required to return to the debtor funds collected

pursuant to a confirmed chapter 13 plan as of the date of

conversion of the case); In re Krahenbuhl, 2013 Bankr. LEXIS

2918 (Bankr. E.D. Wis. 2013) (funds acquired by the chapter 13

debtor postpetition and contributed toward his chapter 13 plan

are not property of the chapter 7 estate and must be returned to

the debtor upon conversion); In re DeSimone, 2013 Bankr. LEXIS

5121 (Bankr. N.J. 2013) (undistributed plan payments must be

returned to the debtor on conversion after deducting the § 503(b)

attorneys’ fees allowed preconversion)(emphasis added).

Here, the bankruptcy court entered the Fee Order after entry

of the Conversion Order albeit prior to return of the Refund to

the Debtors. Under these facts, the Chapter 13 Trustee was

required to return the Refund to the Debtors. See

In re Clements, 495 B.R. 74, 76 (Bankr. E.D. Pa 2013) (where no

order had been entered denying plan confirmation,14 and § 503(b)

attorney’s fees were not allowed until postconversion, all

postpetition assets had to be returned to the debtors on

14 Here, the bankruptcy court entered a memorandum decision

that sustained plan objections and denied confirmation.

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conversion to chapter 7); In re Garris, 496 B.R. 343, 348-49

(Bankr. S.D.N.Y. 2013) (§ 1326(a)(2) permits deduction from funds

on hand of only those § 503(b) claims allowed as of the date of

dismissal of a chapter 13 case, unless the bankruptcy court, for

“cause,” orders otherwise, pursuant to § 349(b)).15 

CONCLUSION

Based on the foregoing, we REVERSE the bankruptcy court’s

Turnover Order. Because we determine that the bankruptcy court

erred in ordering turnover of the Refund or its value, the

enforcement mechanisms contained in the Turnover Order do not

survive and we order that the Firm immediately return any funds

seized pursuant to the Turnover Order.

15 The bankruptcy court relied, in part, on In re Oliver, 222 B.R. 272, 274 (Bankr. E.D. Va. 1998) for the proposition that

attorneys’ fees are to be paid prior to return of funds to

debtor. In re Oliver, however, is distinguishable as it involved

dismissal of a chapter 13 case in which attorneys fees were

allowed by the court from funds on hand, simultaneously with the

dismissal.

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